South Korea is among the few economies experiencing a productivity increase thanks to artificial intelligence, but analysts at Bank of America warn that rising U.S.-China tensions over semiconductor chips could hinder this growth.
According to a report from Bank of America Global Research, the semiconductor sector represents 17% of South Korea’s exports, making it one of the major beneficiaries of the AI boom, with export growth exceeding 50% year-over-year. Analysts express optimism that South Korea’s substantial investments in AI research and development, alongside its increasing number of AI-related patents, will enhance the country’s standing in AI adoption in the long run.
However, potential geopolitical conflicts could impact the semiconductor supply chain, specifically the increasing strain between the U.S. and China. Although South Korea has diversified its chip exports from China to other regions, over 30% of its semiconductor exports in 2023 were still directed to China and Hong Kong, paralleling exports to the U.S.
Bank of America analysts highlight that if geopolitical tensions escalate further, particularly if the U.S. enacts additional trade restrictions on advanced or AI-related chip exports to China, it could severely impact Korean memory chip exports.
Moreover, South Korean semiconductor manufacturers rely on China for certain components and equipment needed in chip production. Any disruption in the supply chain due to rising tensions would complicate the acquisition of essential production tools for these firms.
Reports indicate that the U.S. has requested South Korea to limit exports of equipment and technology used in the production of memory chips and advanced logic chips, particularly those that are more advanced than 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are currently evaluating the U.S. request due to concerns about the potential effects on major South Korean companies, such as Samsung and SK Hynix, which have operations in China, the country’s largest trading partner.
Additionally, the Biden administration is reportedly contemplating the application of an export control policy known as the foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This regulation would prohibit the export of any goods to any country if they contain a specific percentage of U.S. intellectual property.